Category Archives: income tax advice

2016 Year-End Tax Planning for Individuals

 

Although tax planning is a 12-month activity, year-end is traditionally the time to review tax strategies from the past and to revise them for the future. Year-end has also become a time when there is an increasing need to take a careful look at what’s changed within the tax law itself since the beginning of the year. Opportunities and pitfalls within these recent changes – as they impact each taxpayer’s unique situation—should not be overlooked. This is particularly the case during year-end 2016. Here are some of the many consideration that taxpayers should review as year-end 2016 approaches.

Data, including 2015 return

Year-end planning should start with data collection and a review of prior year returns. This includes losses or other carry-overs, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life changes. Alternative minimum tax liability also needs to be explored as well as potential liability for the net investment income tax and the Additional Medicare Tax.

Investments

Taxpayers holding investments toward the end of the year, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling (or like-kind exchanging). Balancing the existing tax rates within those considerations is part of that challenge: the ordinary income tax rates, the capital gain rates, the net investment income tax rate, and the alternative minimum tax (AMT), all play a role.

Income caps on benefits

Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in the other: in this case, either 2016 or 2017. Some of those tax benefits that get phased out depending upon the taxpayer’s AGI level include:

  • itemized deductions
  • personal exemptions
  • education savings bond interest exclusion
  • maximum child’s income on parent’s return (form 8814):
  • medical savings account adjustments
  • education credits
  • student loan interest deduction
  • adoption credits
  • maximum Roth IRA contributions
  • maximum IRA contributions for individuals

PATH Act “extenders” and more

Year to year, the tax law changes; and with it, opportunities and pitfalls that need particular attention at year-end. In many cases, these changes are accounted for based on a tax-year period. Once the current tax year is over, there often is no going back for a “do-over” for a missed opportunity or to correct a costly mistake. Year-end 2016 is no exception to this rule.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted immediately before the start of 2016, permanently extended many tax incentives that were previously temporary, removing for the first time in many years the year-end concern over whether these incentives will be extended either retroactively for the current year or prospectively into the coming year. Not all of these “extenders” provisions were extended beyond 2016, however; and some were modified in the process. Others were extended for up to five years, deferring to “tax reform” a more lasting solution. Here’s a list of the major changes made by the PATH Act, especially focused on how they impact year-end transactions:

  • permanent American Opportunity Tax Credit
  • permanent teachers’ $250 “classroom” expense deduction
  • permanent state and local sales tax deduction election, in lieu of state income taxes
  • permanent exclusion for direct charitable donation of IRA funds of up to $100,000
  • permanent 100-percent gain exclusion on qualified small business stock
  • permanent conservation contributions benefits
  • five-year solar energy property
  • non-business energy property credit through 2016
  • fuel cell motor vehicle credit through 2016
  • mortgage insurance premium deduction through 2016
  • tuition and fees deduction through 2016

Life events

Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning. A change in filing status will affect tax liability. The possibility of significant changes and/ or significant or unusual items of income or loss should be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future, into 2017, and predict, if possible, any events that could trigger significant income, losses or deductions.

Retirement strategies

Taxpayers may want to take a look at a number of different provisions in anticipation of retirement, at the point of retirement, or after retirement. Many of these provisions have opportunities and deadlines associated with the concept of taxable year. Among others, these include contributions to employer plans, strategic use of IRAs and “required minimum distributions,” and timing Roth IRA conversions and reconversions to maximize your retirement nest egg.

Affordable Care Act compliance

The Affordable Care Act (ACA) imposes new requirements on individuals and tightens or eliminates some tax incentives. Year-end planning for individuals with regards to the ACA may generally be more prospective than retrospective but there are some year-end moves that may be valuable, particularly with health-related expenditures.

Acceleration or delay

Year-end tax planning, especially if done “at the eleventh hour,” requires some understanding of the timing rules: when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into next year or beyond.

Income acceleration/deferral. Taxpayers using the cash method basis of accounting can defer or accelerate income using a variety of strategies. These may include:

  • sell appreciated assets
  • receive bonuses before January
  • sell outstanding installment contracts
  • redeem U.S. Savings Bonds
  • accelerate debt forgiveness income
  • avoid mandatory like-kind exchange treatment

Deduction acceleration/deferral. A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense generally will not accelerate a deduction. There are exceptions, including those made in connection with:

  • January mortgage payment in December
  • tuition prepayment
  • estimated state taxes

A New Administration

When the new Administration moves into Washington in January 2017, it is clear that changes will follow. How these changes will impact upon your long-term tax situation remains to be developed. That, and an eventual groundswell for tax reform, make the future more difficult to read than in prior years. Nevertheless, in looking toward the future, you should not lose sight of the short-term tax dollars to be saved immediately through 2016 year-end strategies.

Our tax laws operate largely within the confines of “the taxable year.” Once 2016 is over, tax savings that are specific to 2016 may be gone forever.

October Tax Insight Newsletter

October Newsletter — All about the Amended Tax Return.  Sometimes it is necessary to make changes to a return after you file it… this is where an amended return comes in. Find out more in this month’s newsletter!

September Newsletter — IP PIN

August Newsletter — Deductions

July Newsletter — Mid-Year Tax Planning

June Newsletter — Home Sales

Tax Effects of Divorce or Separation

If you are divorcing or recently divorced, taxes may be the last thing on your mind. However, these events can have a big impact on your wallet. Alimony and a name or address change are just a few items you may need to consider. Here are some key tax tips to keep in mind:

  • Child Support. Child support payments are not deductible and if you received child support, it is not taxable.
  • Alimony Paid. You can deduct alimony paid to or for a spouse or former spouse under a divorce or separation decree, regardless of whether you itemize deductions. Voluntary payments made outside a divorce or separation decree are not deductible. You must enter your spouse’s Social Security Number or Individual Taxpayer Identification Number on your Form 1040 when you file.
  • Alimony Received. If you get alimony from your spouse or former spouse, it is taxable in the year you get it. Alimony is not subject to tax withholding so you may need to increase the tax you pay during the year to avoid a penalty. To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages.
  • Spousal IRA. If you get a final decree of divorce or separate maintenance by the end of your tax year, you can’t deduct contributions you make to your former spouse’s traditional IRA. You may be able to deduct contributions you make to your own traditional IRA.
  • Name Changes. If you change your name after your divorce, be sure to notify the Social Security Administration. File Form SS-5, Application for a Social Security Card. You can get the form on SSA.gov or call 800-772-1213 to order it. The name on your tax return must match SSA records. A name mismatch can cause problems in the processing of your return and may delay your refund. Health Care Law Considerations.
  • Special Marketplace Enrollment Period. If you lose health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. You may enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period, if you lose coverage due to a divorce.
  • Changes in Circumstances. If you purchase health insurance coverage through the Health Insurance Marketplace, you may get advance payments of the premium tax credit. If you do, you should report changes in circumstances to your Marketplace throughout the year. These changes include a change in marital status, a name change, a change of address, and a change in your income or family size. Reporting these changes will help make sure that you get the proper type and amount of financial assistance. This will also help you avoid getting too much or too little credit in advance.
  • Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan, you and your former spouse must allocate policy amounts on your separate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. Publication 974, Premium Tax Credit, has more information about the Shared Policy Allocation. For more on this topic, see Publication 504, Divorced or Separated Individuals.

SOURCE:  IRS Summertime Tax Tip 2016-23

How Selling Your Home Can Impact Your Taxes

Usually, profits you earn are taxable. However, if you sell your home, you may not have to pay taxes on the money you gain. Here are ten tips to keep in mind if you sell your home this year.

1. Exclusion of Gain. You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.

2. Exceptions May Apply. There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, see Publication523 , Selling Your Home.

3. Exclusion Limit. The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.

4. May Not Need to Report Sale. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.

5. When You Must Report the Sale. You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions.

6. Exclusion Frequency Limit. Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.

7. Only a Main Home Qualifies. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.

8. First-time Homebuyer Credit. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.

9. Home Sold at a Loss. If you sell your main home at a loss, you can’t deduct the loss on your tax return.

10. Report Your Address Change. After you sell your home and move, update your address with the IRS.

Are you required to file a Form 1099 or other information return?

If you made or received a payment during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS.

Made a Payment

If, as part of your trade or business, you made any of the following types of payments, use the link to be directed to information on filing the appropriate information return.

  • Payments, in the course of your trade or business: (1099-MISC) (Note: It is important that you place the payment in the proper box on the form. Refer to the instructions for more information.)
    • Services performed by independent contractors or others (not employees of your business) (Box 7)
    • Prizes and awards and certain other payments (see Instructions for Form 1099-MISC, Box 3. Other Income, for more information)
    • Rent (Box 1)
    • Royalties (Box 2)
    • Backup withholding or federal income tax withheld (Box 4)
    • Crewmembers of your fishing boat (Box 5)
    • To physicians, physicians’ corporation or other supplier of health and medical services
      (Box 6)
    • For a purchase of fish from anyone engaged in the trade or business of catching fish (Box 7)
    • Substitute dividends or tax exempt interest payments and you are a broker (Box 8)
    • Crop insurance proceeds (Box 10)
    • Gross proceeds of $600 or more paid to an attorney (generally, Box 7, but see instructions as Box 14 may apply)
  • Interest on a business debt to someone (excluding interest on an obligation issued by an individual) (1099-INT)
  • Dividends or other distributions to a company shareholder (1099-DIV)
  • Distribution from a retirement or profit plan or from an IRA or insurance contract (1099-R)
  • Payments to merchants or other entities in settlement of reportable payment transactions, that is, any payment card or third party network transaction (1099-K)

Received a Payment and Other Reporting Situations

If, as part of your trade or business, you received any of the following types of payments, use the link to be directed to information on filing the appropriate information return.

  • Payment of mortgage interest (including points) or reimbursements of overpaid interest from individuals (1098)
  • Sale or exchange of real estate (1099-S)
  • You are a broker and you sold a covered security belonging to your customer (1099-B)
  • You are an issuer of a security taking a specified corporate action that affects the cost basis of the securities held by others (Form 8937)
  • You released someone from paying a debt secured by property or someone abandoned property that was subject to the debt (1099-A) or otherwise forgave their debt to you (1099-C)
  • You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (1099-MISC)

Not Required to File Information Returns

  • You are not engaged in a trade or business.
  • You are engaged in a trade or business and
    • the payment was made to another business that is incorporated, or
    • the sum of all payments made to the person or unincorporated business is less than $600 in one tax year (unless the recipient is an attorney or law form, see specific instructions for 1099-MISC for further details).

All information comes from : https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return

Social Security Benefits May Be Taxable

What do you mean my Social Security Benefits are taxable??

We hear this question often, and much to many’s dismay — yes, Social Security Benefits can indeed be taxable. A recent tax tip from the IRS broke down this phenomenon.

  • Form SSA-1099.  If you received Social Security benefits in 2015, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits.
  • Only Social Security.  If Social Security was your only income in 2015, your benefits may not be taxable. You also may not need to file a federal income tax return. If you get income from other sources you may have to pay taxes on some of your benefits.
  • Tax Formula.  Here’s a quick way to find out if you must pay taxes on your Social Security benefits: Add one-half of your Social Security to all your other income, including tax-exempt interest. Then compare the total to the base amount for your filing status. If your total is more than the base amount, some of your benefits may be taxable.
  • Base Amounts.  The three base amounts are:
    • $25,000 – if you are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from your spouse for all of 2015
    • $32,000 – if you are married filing jointly
    • $0 – if you are married filing separately and lived with your spouse at any time during the year

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Additional IRS Resources:

What is this Form 1095?

Remember that pesky question, “Did you have health insurance last year?”  If you were enrolled in health coverage for 2015, you may receive a Form 1095-A, 1095-B, or 1095-C, which will answer that question for you.  In addition, if you were an employee of an employer that was an applicable large employer in 2015, you may receive a Form 1095-C.  If you don’t fall in either of these categories, you won’t receive a form.

So what is the difference between A, B and C?

  • Form 1095-A, Health Insurance Marketplace Statement.  The Health Insurance Marketplace sends this form to individuals who enrolled in coverage there, with information about the coverage, who was covered, and when.
    1095-A
  • Form 1095-B, Health Coverage.  Health insurance providers (for example, health insurance companies) send this form to individuals they cover, with information about who was covered and when.
    1095-B
  • Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.  Certain employers send this form to certain employees, with information about what coverage the employer offered. Employers that offer health coverage referred to as “self-insured coverage” send this form to individuals they cover, with information about who was covered and when.
    1095-C

Note: The deadline for the Marketplace to provide Form 1095-A is February 1, 2016.  The deadline for insurers, other coverage providers and certain employers to provide Forms 1095-B and 1095-C has been extended to March 31, 2016.  Some taxpayers may not receive a Form 1095-B or Form 1095-C by the time they are ready to file their 2015 tax return. While the information on these forms may assist in preparing a return, they are not required. Individual taxpayers will generally not be affected by this extension and should file their returns as they normally would.
For more information on the various nuances of these forms (like why you COULD get more than one), visit the IRS’s Questions and Answers about Health Care Information Forms for Individuals (Forms 1095-A, 1095-B, and 1095-C)

Who Can Represent You Before the IRS?

Many people use a tax professional to prepare their taxes. Tax professionals with an IRS Preparer Tax Identification Number (PTIN) can prepare a return for a fee. If you choose a tax pro, you should know who can represent you before the IRS. There are new rules this year, so the IRS wants you to know who can represent you and when they can represent you. Choose a tax return preparer wisely.

Representation rights, also known as practice rights, fall into two categories:

  • Unlimited Representation
  • Limited Representation

Unlimited representation rights allow a credentialed tax practitioner to represent you before the IRS on any tax matter. This is true no matter who prepared your return. Credentialed tax professionals who have unlimited representation rights include:

Limited representation rights authorize the tax professional to represent you if, and only if, they prepared and signed the return. They can do this only before IRS revenue agents, customer service representatives and similar IRS employees. They cannot represent clients whose returns they did not prepare. They cannot represent clients regarding appeals or collection issues even if they did prepare the return in question. For returns filed after Dec. 31, 2015, the only tax return preparers with limited representation rights are Annual Filing Season Program Participants.

The Annual Filing Season Program is a voluntary program. Non-credentialed tax return preparers who aim for a higher level of professionalism are encouraged to participate.

Other tax return preparers have limited representation rights, but only for returns filed before Jan. 1, 2016. Keep these changes in mind and choose wisely when you select a tax return preparer.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Tips to Keep Your Tax Records Secure; Protect Yourself from Identity Theft

If you’re still keeping old tax returns and receipts stuffed in a shoe box stuck in the back of the closet, you might want to rethink that approach.

The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.

You should keep your tax records safe and secure, whether they are stored on paper or kept electronically. The same is true for any financial or health records you store, especially any document bearing Social Security numbers.

You should keep always keep copies of your tax returns and supporting documents for several years to support claims for tax credits and deductions.

Because of the sensitive data, the loss or theft of these documents could lead to identity theft and have an economic impact. These documents contain the Social Security numbers of you, your spouse and dependents, old W-2 income and bank account information. A burglar could easily turn your old shoe box full of documents into a tax-related identity theft crime.

Here are just a few of the easy and practical steps to better protect your tax records:

  • Always retain a copy of your completed federal and state tax returns and their supporting materials. These prior-year returns will help you prepare your next year’s taxes, and receipts will document any credits or deductions you claim should question arise later.
  • If you retain paper records, you should keep them in a secure location, preferably under lock and key, such as a secure desk drawer or a safe.
  • If you retain you records electronically on your computer, you should always have an electronic back-up, in case your hard drive crashes. You should encrypt the files both on your computer and any back-up drives you use. You may have to purchase encryption software to ensure the files’ security.
  • Dispose of old tax records properly. Never toss paper tax returns and supporting documents into the trash. Your federal and state tax records, as well as any financial or health records should be shredded before disposal.
  • If you are disposing of an old computer or back-up hard drive, keep in mind there is sensitive data on these. Deleting stored tax files will not remove them from your computer. You should wipe the drives of any electronic product you trash or sell, including tablets and mobile phones, to ensure you remove all personal data. Again, this may require special disk utility software.

The IRS recommends retaining copies of your tax returns and supporting documents for a minimum of three years to a maximum of seven years. Remember to keep records relating to property you own for three to seven years after the year in which you dispose of the property. Three years is a timeframe that allows you to file amended returns, or if questions arise on your tax return, and seven years is a timeframe that allows filing a claim for adjustment in a case of bad debt deduction or a loss from worthless securities.

To learn additional steps you can take to protect your personal and financial data, visit Taxes. Security. Together. You also can read Publication 4524, Security Awareness for Taxpayers.

Forget Something on Your Tax Return? Amend it!

If you realize you forgot something on your tax return, you can amend that return after it has been filed.

There are many reasons individuals need to amend their returns, whether it is for the just-filed 2014 return or prior year returns. Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return:

  • If you are amending for a refund, be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. Except for amending a return to carry back a business net operating loss (NOL), the IRS will pay refunds only on returns from 2012 through 2014. Some states have a longer statute. The last day to file a federal amended 2012 return for a refund is April 16, 2016.
  • Generally, you do not need to file an amended return to correct math errors you made on the return. The IRS or state agency will automatically make those corrections.
  • If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
  • If you amend returns and owe additional tax, you will be subject to interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
  • If you amend multiple year returns, mail them in separate envelopes to be sure each is received and processed and not overlooked in the multiple return envelope.
  • A detailed explanation of the changes must also be attached to any amended return. This is required to explain to the processing staff the reason for the amendment. An insufficient explanation can lead to additional correspondence and delays.
  • Depending on why you file an amended federal return, you may be required to amend your state return.

An amended return can be more complicated than the original, so its often best to contact a tax professional for assistance in preparing your amended returns.